FIDSON HEALTHCARE PLC. EQUITY NIGERIA HEALTHCARE GTI Securities Research Coverage Analyst: Morolake Bisi-Afolabi Lead Analyst: Chuks Anyanwu c.anyanwu@gti.com.ng DECEMBER 15 th, 2015 Recommendation: BUY KEY STATISTICS AT A GLANCE FAIR VALUE N3.63 CURRENT PRICE N2.56 OUTLOOK INDUSTRY VIEW MARKET CAP PRICE-EARNINGS [P:E] POSITIVE POSITIVE 3.84 billion 2014 TRAILING 9.26X 2015F 5.12X 2016F 4.74X ROE 10.96% ROA 4.01% OUTSTANDING SHARES 1.5Billion YTD (34.36) Fidson Healthcare PLC: a rose on concrete? Fidson Healthcare PLC released its unaudited 9M-2015 result for the period ended September 30 th, 2015, on 26 th October, 2015. The Company reported an 18% decrease in revenue to N6.16 billion from N7.51 billion YoY. Also, input costs and operating expenses declined by 14% and 31% respectively. The slightly higher rate of decline in revenue compared to input costs resulted in a marginal decrease in gross profit margin from 55% to 53% YoY. On the other hand, operating expenses decreased more than revenue, thereby leading to an improvement in operating profit margin from 13% to 18% YoY. Fidson s declining cost lines ensured that net income achieved a marginal improvement of 2% from N466.4 million to N473.5 million YoY, despite declining turnover. Net profit margin therefore improved from 6% to 8%. A quarter-on-quarter analysis shows that revenue was down 24% between Q2 2015 and Q3 2015 from N2.81 billion to N2.12 billion and this translated into a net income shrinkage of 47% from N282.4 million in Q2 2015 to N149.3 million in Q3 2015. This decline in revenue came on the heels of a 128% increase in revenue between Q1 2015 and Q2 2015 that translated into a 575% improvement in net income. We adduce the reversal of the company s revenue performance between Q2 2015 and Q3 2015 to the forces of competition enhanced by the launch of the ECOWAS Common External Tariff (CET) by the Nigeria Customs Service (NCS). Under the CET, finished pharmaceutical products imported into Nigeria from third countries attract a tariff of zero per cent, while the importation of essential pharmaceutical raw materials and packaging materials attract tariffs of 5% and 10% respectively. This tariff has resulted in a surge of drug importation thereby leading to stiffer competition in the pharmaceutical industry. In addition, the implementation of the National Drug Distribution Guidelines (NDDGs) on the 1 st of July, 2015 has put a strain on the sales volume of Fidson Healthcare. This policy aims to shut down unregulated drug markets, where charlatans trade freely, in a bid to ensure a well-ordered drug distribution system and reduce drug counterfeiting. These charlatans however play a key role in the company s drug distribution process as they form about 65 per cent of its key players. These policy changes, coupled with the current uncertainties prevalent in the economic environment have led to a decline in Fidson s net cash generated from operating activities by 41% between 9M 2015 and FY2014 from N3 billion to N1.76 billion.
Profitability Margin 55% 57% 57% 17% 13% 55% 56% 15% 15% 11% 12% 7% 8% 3% 9% Gross Profit Margin Operating Profit Margin PBT Margin Fidson s consistent gross profit margin over the past five years is impressive however, the erratic growth trend of its PBT is a cause for concern. Revenue & EBT Growth 248.9% In response, the company has resorted to cutting costs in order to cushion the effect of reduced sales. This is seen from the decline in operating expenses by 28% between Q2 2015 and Q3 2015. In addition, financial liabilities have declined quarter-on-quarter by 68% and this translated into a 24% decline in interest expense from N143.9 million to N109.5 million between Q2 2015 and Q3 2015. The company is also attempting to generate income from alternative sources as seen from its increased position in available for sale financial assets from N17 million in Q2 2015 to N272 million in Q3 2015. We believe however that Fidson has effective strategies in place that will bolster its top line in the long run. Currently, the company is gearing up for the commissioning of its World Health Organisation (WHO) Good Manufacturing Practice compliant biotech plant, where it will produce Intravenous (IV) infusions as well as current product offerings. This plant is scheduled to become operative by the end of 2015 and will help the company expands its product base. In addition, Fidson recently announced a partnership with Immune Therapeutics Incorporated, GB Pharma, and America Hospitals and Resorts (AHAR) for the marketing and distribution of a new patent-protected product, LodonalTM which is intended to deal with immune-compromising diseases. This partnership will serve as a means for Fidson to leverage its marketing base and distribution channels to promote this product in Nigeria. We are therefore moderately optimistic that this increased manufacturing capacity as well as marketing opportunities will lead to increased revenue in the long run. However, the increased cost of raw materials triggered by the new tariff and adjustments to the reduced prominence of charlatans in the pharmaceutical industry will result in a slower top line growth rate in the short/medium term. VALUATION ANALYSIS 39.3% 28.8% 26.5% 0.9% 5.2% -15.5% -26.4% 2011-23.8% 2012-30.7% 2013 2014 2015F Revenue Growth EBT Growth Fidson s EBT experienced a sudden increase in 2014 while revenue has been on a decline over the past three years. Based on our analysis, Fidson Healthcare PLC is currently trading at a 42% discount to our estimated fair value of N3.63, with a 12 month investment horizon. We focused on the historical financial performance of the stock and our expectation for FY 2015 to arrive at our fair value for the stock. Our fair value for the shares of Fidson Healthcare Plc was calculated using the Dividend Discount Model comprising our expected dividend estimate for the company and GTI Securities customized tweak to adjust for the risk of investing in the Nigerian Health care sector. Our Required Rate of Return (RROR) factors in a risk premium of 9.8% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return. We have placed a BUY rating on the stock of Fidson Healthcare PLC because the stock is undervalued based on our analysis.
5-year CAGR 17.49% 17.07% 19.40% 0.51 0.75 1.06 27.83% Debt to Equity 1.33 1.74 8.9% 5.9% 5.8% 4.0% 3.3% 3.0% 1.9% 1.3% 11.0% 7.91% Fidson s investments in its manufacturing capabilities have been funded with debt. This explains the aggressive growth trend in financial charges. The continuous increase in debt to equity ratio is not surprising as Fidson has consistently invested in its manufacturing capabilities by debt financing ROE & ROA 4.0% ROE ROA Fidson s ROE and ROA experienced a steady decline between 2010 and 2013, however the sudden increase in 2014 net income resulted in the corresponding increase in ROE and ROA. FORECASTS Our FY2015 revenue estimate for Fidson Healthcare is N8.21 billion representing a 15.5% decline from FY 2014, while our net income estimate for FY2015 is N749 million which is an 18.6% increase from FY2014. This yields a forward EPS of 0.50 and a forward P/E of 5.12x. We expect the revenue for FY2015 to come in lower than FY2014 as a result of the newly introduced policies and guidelines in Nigeria. Input costs however, are expected to see a reversal in trend from the Q3 2015 as we expect that the effect of the increased raw material costs as a result of the newly introduced tariff will begin to reflect in the company s financials. As seen in Q3 2015, the company will continue to take advantage of its controllable costs by ensuring that it manages its overhead cost as much as it can. This explains our expected growth in the company s bottom line as Fidson has proven itself to be very proficient in cost management and we do not expect this focus to shift in the near term, especially with its dwindling top line. We have upgraded our EPS projection for FY2015 to N0.50 from N0.46 and consequently adjusted our fair value estimate to N3.63 from N2.89 to reflect the expected growth as a result of the company s expansion drive. Going forward, we expect to see a growth trend for Fidson on a year-onyear basis between FY2015 and FY2016 as a number of factors point to the fact that Fidson is strategically positioned in the Nigerian healthcare sector and its expansion drive will trigger a revenue upsurge going forward. It is the company s vision to add value to the lives of the Nigerians by providing affordable and superior pharmaceutical products. The company has invested in research and development of new products as well as a continuous investment in its own local capability. This is evidenced by its soon-to-be commissioned biotech plant which will allow the company compete effectively in the IV infusions market. This market is currently dominated by a small number of sellers, which means that Fidson can benefit from untapped market. Our outlook for the pharmaceutical industry in Nigeria is positive despite the fact that the industry is currently plagued with economic uncertainties, new tariffs as well as infrastructural deficits, all of which inflate the cost of producing within the country. We are hopeful that in the long term, the new policies and guidelines that have brought about stiff competition and a loss of key distributors, will sway the industry in a positive direction towards achieving its growth potentials.
INVESTMENT CONCLUSION/OUTLOOK FOR FIDSON HEALTHCARE PLC The shares of Fidson Healthcare is undervalued as it is currently trading at a 42% discount to our fair value estimate of N3.63. Although 2015 has been a rocky year with respect to the tough and challenging political and economic environment, Fidson Healthcare has been able to return a profit of 2% over the past nine months (compared with FY2014). This is impressive considering the fact that its revenue, the ultimate source of sustained growth, has declined YoY. The company remains resilient and has put strategic plans in place to deepen its brand within the pharmaceutical sector in Nigeria. Over recent years, the company has made substantial investments to increase its local capabilities while expanding its product base. The company has also sought oversees marketing partnerships which we believe will further boost its brand recognition and enable it attract a new customer base while retaining old ones. We are optimistic that the company will begin to fully reap the fruits of these investments in the coming year. Nigeria s large infrastructural deficit has inflated the cost of producing and transporting the products of pharmaceutical companies. Also, the prohibitively high cost of accessing power in particular, still poses a huge challenge for the company. However, the recent change in government and the proposed plans that will ensure a better operating environment has instilled some sense of optimism and confidence in the Nigerian economy. We have placed a BUY recommendation on the shares of Fidson Healthcare because it is currently trading at less than its fair value of N3.63, and this suggests that the company still has growth opportunities that are yet to be tapped. 2011 2012 2013 2014 2015F 2016F N '000 000 N'000 000 N'000 000 N'000 000 N'000 000 N'000 REVENUE 7103.45 7168.94 9235.06 9719.19 8214.53 9651.32 PBT 472 540.08 249.59 870.81 1101.68 1188.84 PAT 311.81 206.89 154.98 631.82 749.15 808.45 EPS 0.21 0.14 0.10 0.42 0.50 0.54 CASH DIVIDEND 0.10 0.10 0.12 0.10 0.15 0.25
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